What is the difference between an installment loan and revolving debt?

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LOS ANGELES, June 14, 2021 / PRNewswire / – Two common types of debt are installment loans and revolving loans. Both can be used for a variety of purposes, from personal spending to debt refinancing, and more. Borrowers fill out a loan application and undergo a formal credit check to review any of them, and both can assist in obtaining a loan. Finally, both can be secured (collateral required) or unsecured, although secured installment loans and unsecured credit cards are the more common options for either.

Apart from this, each type of debt has different characteristics that make it more suitable for certain types of expenses. Here are some of the differences between installment plan versus revolving loan, and each has its own pros and cons.

Installment Loans
An installment loan (or an installment loan) is a type of debt with a fixed predetermined maturity and expiration date. They can be fixed or variable rates and usually include an amortization schedule that gradually decreases the underlying balance with fixed payments over time.

Here are some examples of installment loans:

  • Car loans
  • Mortgage
  • Personal loans
  • Refinancing loans
  • Student loans
  • Most business loans

When receiving a loan in installments, the borrower immediately takes a fixed amount of the debt. In some cases, they can even refinance in the future with a lower interest rate and monthly payment, which is especially useful for mortgages.

Revolving loan
A revolving loan allows people to borrow as much as they want, when they want, within a predetermined credit limit. The two main types of revolving credit are as follows:

  • Credit cards
  • Credit lines

If a borrower reaches this credit limit on their card or line, they cannot borrow more money until they pay off some of their revolving debt.

Credit cards in particular have several benefits when used wisely. Borrowers can earn points that can be redeemed for cashback or even travel. Road maps offer many other perks such as TSA pre-screening fees and checked baggage refunds.

A revolving loan can also be useful for consolidating debt or making one-off large purchases. Some credit cards offer an initial 0% annual rate on balance transfers (so the borrower can transfer debt to the card and pay off interest-free) and purchases within a specified period of time after opening.

Installment loans vs revolving loans: the verdict
Installment loans are much more fixed in terms of the amount to be paid and the length of time, making them rewarding for large purchases (such as a house, car, or furniture) and debt refinancing. On the other hand, revolving loans can be more flexible. Borrowers can access funds as needed, making them excellent for loan and day to day expenses. Each has its own time and place and, if used correctly, can make a significant contribution to a borrower’s credit and finances.

Note. The information provided in this article is for informational purposes only. Check with your financial advisor about your financial situation.

SOURCE Advance America

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